[Year-End Tax Settlement] How to Use Pension Accounts for Year-End Settlement

For some, the annual year-end tax settlement is a '13th month salary', but for the unprepared, it can be a 'tax bomb'. In this post, we will analyze specific strategies and precautions to receive a refund of up to 1.485 million KRW using Pension Savings Funds and Individual Retirement Pensions (IRP).

[Year-End Tax Settlement] Making the 13th Month Salary | Get back up to 1.48 million KRW with Pension Savings and IRP

1. Expansion of Tax Deduction Limit: The Magic of 9 Million KRW

Starting in 2023, the tax deduction contribution limit for pension accounts was raised from the existing 7 million KRW to 9 million KRW. This is a strong incentive from the government to encourage retirement preparation.

The key numbers we need to remember are '9 million KRW' and '16.5%'. If you contribute a combined annual total of 9 million KRW to Pension Savings and IRP, you can enjoy the following tax refund effects depending on your total salary level.

• Total salary 55 million KRW or less: 16.5% deduction (Max 1.485 million KRW refund)
• Total salary over 55 million KRW: 13.2% deduction (Max 1.188 million KRW refund)

It is like earning a guaranteed return of 13.2%~16.5% just by saving. This is a tremendous benefit that is hard to find in the current era of low interest rates.

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2. Pension Savings Fund vs. IRP Comparative Analysis

Both accounts share the same purpose of 'retirement preparation' and 'tax savings', but there are decisive differences in operational regulations and subscription conditions.

Category	Pension Savings Fund	IRP (Individual Retirement Pension)
Eligibility	Anyone can join	Income earners (Employees, Self-employed, etc.)
Tax Deduction Limit	Max 6 million KRW	Max 9 million KRW (Combined with Pension Savings)
Investment Assets	100% Risk Assets possible (ETF, etc.)	70% Risk Asset Limit (30% Safe Assets mandatory)
Early Withdrawal	Partial withdrawal possible	Impossible except for legal reasons (Only full termination possible)

In particular, the proportion of Risk Assets investment is important. Pension Savings Funds can invest 100% of assets in equity ETFs like the S&P 500 or Nasdaq 100, but IRPs must hold at least 30% in safe assets (deposits, bonds, etc.).

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3. Optimal Contribution Strategy: The Golden Ratio 6:3

So, how is it most efficient to fill the 9 million KRW limit? Putting everything into an IRP blindly is not the answer.

The most rational ratio recommended by experts is 'Pension Savings 6 million KRW + IRP 3 million KRW'.

1. Pension Savings Priority (6 million KRW): Early withdrawal is relatively free, and aggressive management is possible as there is no limit on risk asset investment. Also, there are no separate account management fees.
2. IRP Additional Payment (3 million KRW): Pay the remaining 3 million KRW exceeding the deduction limit of Pension Savings (6 million KRW) into the IRP to fill the total deduction limit (9 million KRW).

Using this strategy allows you to secure liquidity of funds to some extent while fully claiming tax benefits.

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4. Precautions: Be Careful with Termination

As strong as the tax benefits are, the penalty for early termination is also heavy.

Caution: Other Income Tax 16.5%
If you terminate the pension account or withdraw early before age 55, a 16.5% Other Income Tax will be imposed on the principal and investment returns that received tax deductions.

This is like spitting back out the tax refund you received. Therefore, the money put into the pension account should be surplus funds that you do not need to use right away. If you try to fill the limit unreasonably and have to cancel because you need urgent money, you may actually suffer a loss.

The content of this blog is for reference only regarding investment judgments, and investment decisions must be made under the individual's own judgment and responsibility. In no case shall the information in this blog be used as evidence of legal responsibility for investment results.